Will David Cameron's veto protect the City?

David Cameron refused to sign up to the new EU treaty after his demands for greater protection of the City were rejected. Polling suggests 57% of the public support his decision and the Tory backbenchers are thrilled. But will his veto help protect the City?

Last week, as David Cameron set off for the EU summit promising to get new protections for the City from over 20 financial regulations coming down the pipeline, Reality check asked what those threats were. We concluded that the threats were real; a deliberate attempt to curtail risky banking practices and a repeat of the banking crisis.

The financial regulations being implemented and considered in Europe are largely a response to the last financial crisis and measures such as a financial transactions tax, the reform of short-selling and hedge-funds are all designed to create more responsible behaviour in all the major financial centres. The banks certainly see that as a threat to them; it is supposed to be.

When Cameron failed to gain traction in the early hours of Friday morning, he enacted his veto throwing the EU into constitutional crisis, marking the worst split of the coalition government and simultaneously winning plaudits from his Eurosceptic backbenchers and the public. According to a poll in The Times today, 57% backed the move (£).

But will the City be better protected? Has he achieved his aim?

The claim

This is the first veto in history not to stop something. The plans are going right ahead. It was a phantom veto against a phantom threat. David Cameron didn't actually stop anything because the other 26 are going on and the provisions of the treaty would not have weakened our rights and freedoms one iota. Fifty-six years ago Anthony Eden walked away from the founding of the European Union and we paid the price for 20 years. This has been an Anthony Eden moment for David Cameron.

Analysis

Cameron went to Brussels asking for protection for the City from regulations. As we established on Thursday, these were not on the agenda or part of the treaty discussions, but unilaterally raised by the prime minister as a condition for his support.

By using the veto, many are now arguing that the City has a weaker chance of protection from excessive regulations than before. All financial regulations are subject to qualified majority voting, which means that countries must build alliances to oppose a decision and some are arguing that that could be made even harder because relations with the UK have soured.

All the main political parties oppose a financial transaction tax if it is applied only to Europe and not America as well. The fear is business will just flood to the States.The Tobin tax has been proposed, but the UK would have a veto anyway and it couldn't be imposed. But the UK was also asking for some elements of regulations to be toughened – the EU proposals on capital reserves, the amount banks in the vaults as opposed to the balance sheet, are more lax than in the UK proposals, which the government here support.

None of these are changed by the veto.

Ian Traynor, the Guardian's European editor who has been covering every twist and turn in the saga, writes:

Guardian

Cameron hijacked the summit with his demands for protections, exemptions, and concessions for the City in any future EU financial markets regulations. It is 100% clear to me at least that he damaged rather than aided the City's interests. There are around 20 pieces of financial regulation in the pipeline from the commission. Once the commissioner in charge, Michel Barnier of France, gets going, why on earth should he do Cameron any favours? Jonathan Faul, his director-general (most senior Eurocrat), is British and was put there deliberately to temper Franco-Dirigiste zeal. He's now in a very difficult position.

Commission proposals basically go to QMV vote in council (27 governments) before passing. UK has no veto and more likely now to be outvoted. Cameron won nothing and with his veto forced the rest to forge an international treaty between governments on the euro crisis, meaning UK has no voice or vote there

Simon Tilford, chief economist at the Centre for European Reform, told me:

I find it very hard to understand why the exercise of this veto is some kind of victory for the City. I don't think that's shared unanimously across the City. It's not going to make it easier to contest ill thought out regulations, if anything it's going to make it harder because Britain has burnt a lot of bridges here.

It's going to make it difficult for Britain to forge the necessary coalitions of interest. It's going to make it even easier for Britain to be pigeon holed as in the pockets of the city. That's quite unfair because it has done more to address the problems than Germany and France in splitting banks and improving capital requirements. The French and Germans have been foot dragging. I find it very difficult to see any silver lining in this. Had he vetoed this on the grounds of it being a suicide pact that believes the crisis can't be helped by ever increasing austerity, I would have thought he had an argument. He obviously felt the need to throw the Eurosceptics some red meat but the danger is he will have emboldened them and weakened the UK in Europe.

Damian Chalmers, professor of European law at the London School of Economics told me:

60% of the EU's financial services are in the City of London. The UK has 9% of the votes under QMV. Cameron was asking for a lot of safeguards on UK financial services industry ensuring that the European Banking Authority continues to be based in London, a protocol that the UK could be exempted from future regulations. It's like the Germans saying they want to pull back from all regulation affecting the car industry. You've got most of the member states very fed up with financial services industry, and one state very dependent on it with weak voting power. But all the things Cameron's worried about could be done under existing EU law, he's not stopped it.

Chalmers said that Cameron had not achieved anything with his veto because the 26 would still go ahead, and would most likely be able to use the EU's institutions, despite the Tories in government said that they would use their veto to block it (something the Lib Dems say is unsustainable). Chalmers said that the legal standing of a group of countries using the institutions of the EU was "ambiguous" and the matter would probably end up in a supreme court challenge. He said:

The likelihood is that they will use the EU institutions – is Cameron really going to bust his gut and create a crisis of the EU over the commission not being able to take Malta to court because of the high budget deficit?

Open Europe, which describes itself as "in favour of cooperation with Europe, but campaigning for it to do less and better" and declares on its website that it is supported by the heads of a number of banking groups, last week published a report identifying the 49 regulations that it said are a threat to the City. Mats Persson, its director, has argued that Cameron had no choice but to veto the treaty because of the political pressure at home - but also because of the potential threat to the City. He said:

In what was a very difficult situation, Cameron had little choice but to wield his veto. He was under domestic political pressure but, most importantly, he genuinely felt that there were vital UK interests at stake. However, this use of political capital will only be a sound investment if it is followed up with a concerted push for a more flexible, adaptable and competitive EU in which the UK can feel at home.

The eurozone countries now enter a legal minefield in their bid to draw up new treaty commitments on debts and budgets that can credibly be enforced and, for the UK, the threat remains that the EU institutions are colonised by eurozone interests.

Interestingly, he argues that in the battle that will ensue over whether the 26 states are allowed to use the EU institutions, there is room for further negotiation. This is a point that Professor Chalmers also made to me. He suggested that there was more room for negotiation, for example Cameron could allow the 26 to use the institutions in exchange for some amendments to the financial transactions tax. He said:

It's not inconceivable that they will negotiate so that the 26 can use the institutions and Britain gets some amendments to the FTT. If I was betting money that's what I would suspect.

Verdict

Cameron's veto is not a veto in the traditional sense because the treaty has gone ahead regardless. Cameron's bid to safeguard the City could even have been harmed if relations now sour and Britain struggles to get support to oppose financial regulations come to a vote of the full council.

However, there is now room for further negotiations to avoid what could be a protracted legal battle over whether the 26 can use the institutions and courts of the EU. The government could still try and get some amendments to plans for a financial transactions tax, for example. This might also help ease some of Cameron's domestic troubles with the Liberal Democrats - all three major parties oppose a FTT confined to Europe alone.